JP Morgan's "Whale" of a trade

[Jan Klimkowski]

Ah, sniff sniff... smells like.... brown trouser time for the bankers.


Market Ticker's Denninger writes:

So My Speculation On JPM Was Correct?


I hate it when I'm right.

The other day I speculated on Capital Account that we still don't know where the rest of the losses that must be taken from the housing insanity really are. Back in the 2007 timeframe I ran a "back of the envelope" calculation and figured we had about $3 trillion in losses in the system from various housing-related insanities -- subprime, ALT-A, CDOs made out of them and other associated trash. The problem is that only about $1 trillion of losses have been pushed out into the open and disposed of, which means that the other $2 trillion is sitting around somewhere.

It appears that we found part of the "somewhere".

The unit at the centre of JPMorgan Chase's $2bn trading loss has built up positions totalling more than $100bn in asset-backed securities and structured products the complex, risky bonds at the centre of the financial crisis in 2008.

These holdings are in addition to those in credit derivatives which led to the losses and have mired the bank in regulatory investigations and criticism.

The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.

So JP Morgan has been buying up the crap and then "insuring" it with big derivative positions -- and had that "hedge" go bad? That would explain a few things.

Oh, and the size of the "non-vanilla" portfolio there now? Over $150 billion, reportedly.

Just a $2 billion (now said to be $3 billion) loss eh? Oh now that's a rather interesting question isn't it? Exiting from that position is likely to be an amusing enterprise to watch the bank attempt, and the people on the other side of these trades are rather likely to see if they can hammer JPM some more on the way out the door.

The problem with derivatives is that not only do they come stuffed with plenty of leverage but for everyone who wins someone must lose, and vice-versa. Now that JP Morgan's "holdings" are becoming more-known and the market has turned on them the amusing part of the market "coming after you" begins.

We allow this sort of crap to go on without fitting people for striped jumpsuits and stainless steel bracelets in our so-called "too big to fails"...... why?

(Note: This is only "amusing" if you're watching from the sidelines with a bag of popcorn. If you're dumb enough to set yourself up for such an event it's rather more like scrounging through an old warehouse, getting lost in the twisty little mazes made up of old boxes and crates, then realizing that Freddy Krueger and Eddie Scissorhands are stalking you )